8@eight: Simmering US-China tensions unsettle markets, $A drops

By Kyle Rodda

May 22, 2020 — 7.57am

Wall Street retreated as the tensions between the US and China escalated, setting up the ASX to edge lower at the open. Near 7am AEST, futures are pointing to a drop of 7 points, or 0.1 per cent, at the open.

1. Geopolitical tensions rise between the US and China: Risk-assets dipped overnight, with global stock markets failing to extend the week’s rally. US and China trade and diplomatic tensions were largely responsible for the cooling-off of risk-appetite.

The threats and war-of-words between the two countries escalated last night, prompted by the announcement from the Chinese Communist Party that it will today table a new Hong Kong security law, designed to clamp-down on sedition and public disorder in the administrative region. The bill brought calls for new sanctions from US Congress on Chinese officials, prompting push-back from China’s leadership, who’re accusing the US of infringing upon China’s sovereignty.

2. Stocks dip, but week’s trade remains in positive territory: The ratcheting-up of geopolitical tensions has forced market participants to price-in the heightened risk of a renewed trade-war between the US and China. European stocks dropped as the public slanging-match unfolded yesterday, with the DAX and FTSE100 falling 1.41 and 0.86 per cent respectively.

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The S&P500 shed 0.8 per cent in US trade, in a day of broad-based declines, but one in which the day’s losses were paced by the IT sector. Perhaps a silver-lining in the night’s session for global stocks: the sell-off did see the S&P500 maintain its price above several key levels of technical support, underlining the market’s still bullish bias.

3. Havens recover in G10 FX, as AUD lags the pack: It was risk-off across G10 FX overnight, too. The risks to global growth saw commodity currencies underperform, in favour of safe-havens. The US Dollar rallied across the board, with flow heading into US Treasuries on the search for safety, while the Japanese Yen was also generally higher across the board.

The AUD/USD was the currency spaces biggest laggard, dropping roughly half-a-per-cent as fears build that the Australian economy could be at the centre of China’s increasing trade and diplomatic hawkishness. Despite the anti-risk day, gold prices fell, hit by a strong Dollar, and reversal in momentum after the yellow metal failed to hold above $US1750 yesterday.

4. Data docket delivers a mixed day of results: The data pulse overnight was mixed, and though generally delivered a handful of upside surprises, it did little to change the perception of current macro-economic fundamentals.

A spate of PMI surveys were published overnight, with European and US services and manufacturing activity picking-up last month, courtesy of easing social distancing measures. US jobless claims data came in roughly in line with expectations at 2.4 million. However, the continuing claims number lifted to 25 million, suggesting the official US unemployment rate is likely set to increase in the coming months.

5. ASX200 to open down, as trade tensions simmer: The ASX200 is set to open slightly lower this morning, with SPI Futures pointing to a narrow 0.1 per cent drop for the index at the open. It follows a negative day for the local stock market yesterday, which saw the ASX200 shed 0.4 per cent.

Local investors had the nerves tested yesterday, after news flowed through the market that Chinese authorities are implementing changes to the way iron ore imports are inspected at its ports. Though Chinese state media has pushed back against the notion, it is feared that the policy change may open the risk of tighter trade-restrictions from China on Australian iron ore exports in the future.

6. All eyes on China’s National People’s Congress: Market participants will be directing their attention to China today, as the nation kicks-off its belated National People’s Congress. Traders are keenly anticipating a raft of economic stimulus policies to be announced by the Chinese government, with markets expecting a new fiscal package that will surpass the size of the spending program rolled-out in the aftermath of the Global Financial Crisis.

The markets are also awaiting an update on China’s economic targets for the year, with the expectation that the Chinese government will formally withdraw its 6 per cent growth target.

7. Market participants to be on central bank watch: Traders will be on central bank watch today. First-and-foremost, the Bank of Japan is holding an extraordinary meeting this morning. No change to existing policy settings is tipped, but the BOJ is expected to announce a new private lending facility, somewhat imitating the US Federal Reserve’s main-street lending program.

The European Central Bank will also publish the accounts of its last meeting. Few surprises are expected, but market participants will be looking for clues that the ECB may consider expanding its asset purchasing program going forward.

8. Market watch:

ASX futures down 7 points or 0.1% to 5537 near 7am AEST

AUD -0.4% to 65.69 US cents

On Wall St: Dow -0.4% S&P 500 -0.8% Nasdaq -1%

In New York: BHP -0.7% Rio -1.1% Atlassian -2%

In Europe: Stoxx 50 -1.3% FTSE -0.9% CAC -1.2% DAX -1.4%

Spot gold -1.5% to $US1722.44 an ounce at 2.35pm New York time

Brent crude +0.7% to $US36.00 a barrel

US oil +0.9% to $US33.80 a barrel

Iron ore +1.4% to $US98.26 a tonne

Dalian iron ore +2.8% to 731 yuan

LME aluminium +0.7% to $US1523 a tonne

LME copper -1% to $US5387 a tonne

2-year yield: US 0.17% Australia 0.24%

5-year yield: US 0.34% Australia 0.38%

10-year yield: US 0.67% Australia 0.90% Germany -0.50%

US prices as of 5pm New York

This column was produced in commercial partnership between The Sydney Morning Herald, The Age and IG